05/08/2017
Joe America:
A most interesting comment from 'Chemrock' on my blog regarding the PH economy:
"The banana republic awaits any country that doesn’t correct its economy when it goes into a free fall. Many countries reached the brink, peered over it, and got their senses back, making lots of sacrifices to do things right, including stringing corrupt leaders in the gallows. I see lots of Filipinos still do not believe there is a brink, unwilling to make sacrifices (by which I mean accepting salvation by delayed gratification, the economic pill offered by Pnoy), and a blind acceptance of a leadership that is offering nothing of economic sense at the moment.
The economic plight of the Philippines will be reflected in 3 key metrics — the exchange rate, the current accounts balance, and the central bank foreign reserves. One year under Dut, all 3 metrics are headed in the wrong direction. An erratic leadership with flip-flopping policies, no clear economic direction, and horrible human rights reputation is sending all the wrong signals that can only result in amplifying the trade imbalance. The damage will be felt in the weakening exchange rate. Part 1 of the tax reform and a weakened exchange rate is going to rouse the sleeping killer – inflation, which has been well managed under Tetangco in the past decade. In order to control inflation and protect the peso, the central bank has two options — increase interest rates or intervene in the currency market. Increasing interest rates will dampen the economy, so in the short term, it will most likely intervene in forex market. To intervene in the forex market it tends to lose heavily in it’s foreign exchange reserves. In just one year, this admin has lost almost 6% of its forex reserves. It is raiding the reserves each time the president curses at somebody.
The admin has said the total infra is $9 trillion but it will be funded 80% domestically and 20% foreign loans. That means $1.8 trillion foreign loans. Pnoy handed over an external loan of $74.5 billion so this admin will increase it to $2.55 Trillion, a whopping increase of 241%. Question is can the Philippines economy sustain this level of external debt? The economic planners want to follow all the countries in the world that have gone on a credit spree taking advantage of a zero percent interest regime for the last decade or more. I think they may have missed the low interest boat. All indications are, interest rates are moving up again. The repercussions on a $2.55 Trillion external debt is horrendous. Every increase by 1% increases debt servicing by $25.5 billion. Consider this — Philippines budget in 2017 was 3.35 trillion pesos, @ 50 = $ 67 billion. Just 1% increase in interest will suck up 17% of the entire budget. Is that sustainable? One thing is for sure. Debt servicing will severely strain the peso exchange rate and central bank reserves in the years to come.
I can’t say if it will be a Venezuela scenario, but the economic trajectory of Philippines is not comforting for sure.
Velenzuela’s problem was due to Chavez overselling on his socialist policies. Don’t get me wrong, a bit of socialism is always required. When a society prospers, it must always have a safety net for those left behind. But when the objective of socialist policies was to bolster political populism and to remain in power, it is grave mis-use of the state coffer. All the wealth from oil was mis-used. Duterte hasn't got to that destructive level yet. But that is because he hasn't got so much state funds. Let’s assume the joint venture projects take off and money flows in, that’s when the test will be on Dut. Will he go the same socialist way to remain in power? So far he has shown a willingness to take the soft option of socialist policies to diffuse political tensions re — the SSS increased payout, Kadamay occupation of govt housing. Police and AFP doubling of salaries still to be realised.
Because he thought he had oil, Chavez went on a borrowing spree for infras and socialist objectives. His demise came about when the price of oil plummeted, the rug was pulled from under his feet. So that begs the question. Why do the economic planners of the Dut admin make such audacious plans – a $2.55 trillion external debt? Was there a knowledge that Philippines state coffers will flow from the richness of the West Philippines Seas vis-a-vis joint venture with China? Are we to buy into the conspiracy theory of Arroyo-China involvement long before the election? That what’s happening is a fait accompli?
Under Chavez, Venezuela took on so much Chinese debt. When they could not repay, they were forced to buy Chinese products . . in exchange for the oil. They ended up having so many Chinese refrigerators that the govt sold them off at huge discounts that came to be known as the ‘Chavez discount’. Today, every Venezuelian owns a Chinese refridgerator, but there’s no food inside. I don’t know if we will have a Dut’s discount scheme any time soon."
